Spain to spend billions on bank rescue

Bankia's Ex-Chairman Rodrigo Rato gives a press conference to announce the 2011 annual results in Madrid on February 10, 2012.

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Spain is planning a state bail-out of Bankia, the country's third biggest bank by assets

Move is likely to involve the injection of billions of euros of public money into the troubled lender

Spain is planning a state bail-out of Bankia, the country's third biggest bank by assets, in a move likely to involve the injection of billions of euros of public money into the troubled lender.

In an abrupt reversal of policy, the Spanish government, which had previously insisted that no additional state money would be needed to clean up the country's banking sector, confirmed that an intervention was being prepared.

Soon after the news broke, Rodrigo Rato, Bankia's executive chairman and a former International Monetary Fund managing director, resigned from the bank that had been formed in 2010 out of a merger of seven Spanish savings banks, or cajas.

Mariano Rajoy, Spain's prime minister, said in a radio interview that the government would consider injecting state funds into the banking sector if needed.

"If it was necessary to reactivate credit, to save the Spanish financial system, I would not rule out injecting public funds, like all European countries have done," Mr Rajoy said.

The bursting of Spain's property bubble has seen the level of bad loans as a proportion of total lending rise to the highest level in 18 years, leaving banks managing vast portfolios of repossessed and unsold real estate, and choking off credit to an economy that is suffering its second recession in three years.

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The government can deploy the state-backed Frob bank restructuring fund to pump capital into Bankia and is considering the use of contingent convertible bonds, known as cocos, an economy ministry source said.

The official would not say how much money would be needed. But Spanish press reports indicated that Bankia could receive €7bn-€10bn of additional capital. Bankia declined to comment.

Mr Rato, a former finance minister who was placed in charge of Bankia in spite of having little experience as a commercial banker, announced that he had proposed José Ignacio Goirigolzarri, former chief executive of rival BBVA, as his successor.

Mr Goirigolzarri was recommended after consultation with the Spanish government, one person close to Bankia said.

Last month, the IMF singled out Bankia as the largest risk to the stability of the Spanish banking sector, with the fund recommending that it and other banks take "swift and decisive measures to strengthen their balance sheets and improve management and governance practices".

Part of the bank was listed on the Madrid stock market last year, raising €3.3bn from private savers and Spanish institutions -- a move criticised by many analysts and investors for failing to recapitalise Bankia sufficiently.

Two of Bankia's constituent cajas, Caja Madrid and the Valencian Bancaja, have historically had strong ties to the ruling centre right Popular party of Mr Rajoy.

Bankia shares, which slid 3 per cent on the news to €2.38, have fallen 36.5 per cent since their listing last summer.

Some bankers and analysts have argued that BFA, Bankia's parent company which controls the listed entity and houses the combined group's worst quality assets, needs significantly more capital.

BFA said last week it had renegotiated €9.9bn of assets last year to avoid them being classified as bad loans, equivalent to 5 per cent of the bank's €188bn loan book.

One adviser to Spanish banks and government agencies said that if the amount Madrid injected into Bankia was not sufficient, and did not involve a much improved management of its bad assets, then the plan risked achieving little.

"Just injecting capital would be the equivalent of rearranging the deck chairs on the Titanic," the person said. "I think Spain has not admitted to itself just how weak some of its banks actually are and how serious the situation is."